Derivative Contracts

Derivative is a financial instrument whose price is dependent upon or derived from one or more underlying assets. These are generally used as an instrument to hedge risk, but can also be used for speculative purposes. The most common finance derivatives are futures contracts, forward contracts, options and swaps.

There are two types of financial derivatives,

1. Over-the-counter (OTC).

These are contracts that are traded directly between two parties, without going through an exchange or other intermediary.

2. Exchange-traded (ETD).

These are the contracts that are traded via specialized derivatives exchanges or other exchanges. Options and futures are the financial derivatives which are considered as ETD derivatives. Due to number of traders on single and centralized system chances of manipulation by operators is absent in exchange traded markets. The financial markets have become subject to interest rate movements more than these were in the past decades. As a result, financial derivatives have appealed to corporate treasurers who wish to take advantage of favorable interest rates in the management of corporate debt without the expense of issuing new debt securities.

Standardized derivative contracts (e.g., futures contracts and options) that are transacted on an organized futures exchange. Futures and stock options are the two most widely publicized leveraged derivative instruments in the world today.


Futures involve a financial contract that requires the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a specific price on a predetermined date in the future. If you buy a futures contract, you are basically agreeing to buy something that a seller has not yet produced for a set price. Whether you are dealing in orange juice, wheat, pork bellies, silver or gold, if you are investing in commodities, you are dealing in the futures market. Actually you are betting on the future of the commodity.


A contract that permits the owner, depending on the type of option held, to purchase or sell an asset at a fixed price until a specific date. An exchange traded option is an option that is traded on a regulated exchange, where the terms of each option are standardized by the exchange. The contract is standardized so that underlying asset, quantity, expiration date and strike price are known in advance.

In the field of options, binary options are getting popular in market traders, due to their limited risk ration and simplicity involved in their trading.